Oil Price Overbought RSI Signal Persists As US Inventories Contract

The price of oil climbed to a fresh monthly high ($56.33) as US crude inventories narrowed 994K in the week ending January 29 following the 9.910K decline the week prior, with field production sitting at its lowest level since 2018.

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Image of EIA Weekly US Field Production of Crude Oil

The update from the Energy Information Administration (EIA) showed US output holding steady at 10,900K for the second consecutive week, and key market themes may keep oil prices afloat in 2021 as the Organization of the Petroleum Exporting Countries (OPEC) continue to regulate the energy market, with Saudi Arabia still on track to reduce supply by 1 million b/d until April.

The press release following the Joint Ministerial Monitoring Committee (JMMC) suggests OPEC and its allies will regulate production throughout 2021 as the group agrees to be “vigilant and flexible given the uncertain market conditions,” and the price of oil may continue to retrace the decline 2020 high ($65.65) ahead of the next meeting on March 3 as the committee acknowledges that “the gradual rollout of vaccines around the world is a positive factor for the rest of the year, boosting the global economy and oil demand.”

In turn, subdued supply along with signs of stronger consumption may keep crude prices above pre-pandemic levels, and the technical outlook remains constructive as the price of oil continues to track the upward trending channel carried over from November.

With that said, the rebound from the monthly low ($51.64) may gather pace as the price of oil carves a series of higher highs and lows, and the overbought signal in the Relative Strength Index (RSI) may continue to coincide with higher oil prices like the behavior seen earlier this year.

OIL PRICE DAILY CHART

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Image of Oil price daily chart

Source: Trading View

  • Keep in mind, crude broke out of the range-bound price action from the third quarter of 2020 following the failed attempt to close below the Fibonacci overlap around $34.80 (61.8% expansion) to $35.90 (50% retracement), and the price of oil may continue to retrace the decline from the 2020 high ($65.65) as both the 50-Day SMA ($49.42) and 200-Day SMA( $40.43) track a positive slope.
  • More recently, crude has broken out of the range-bound price action carried over from the end of January to extend the upward trend established in November, but the Relative Strength Index (RSI) has failed to keep up as a break of trendline support emerged ahead of February.
  • Nevertheless, recent developments in the RSI continues to offer a constructive outlook as the oscillator holds above 70, with the extreme reading likely to be accompanied by higher oil prices like the behavior seen earlier this year.
  • The Fibonacci overlap around $56.00 (23.6% expansion) to $56.70 (61.8% expansion) remains on the radar as the price of oil carves a series higher highs and lows, with the next area of interest coming in around $58.00 (50% expansion) to $58.40 (23.6% expansion).

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